Question

The maternity wing of the city hospital has two types of patients: normal and cesarean. The standard quantities of labor and materials per delivery for 20X1 are:

------------------------------Normal ----------Cesarean

Direct materials (lbs.) ----9.0 -----------------21

Nursing labor (hrs.) -------2.5----------------- 5

The standard price paid per pound of direct materials is $10.00. The standard rate for labor is $16.00. Overhead is applied on the basis of direct labor hours. The variable overhead rate for maternity is $30.00 per hour, and the fixed overhead rate is $40.00 per hour.

Actual operating data for 20X1 are as follows:

a. Deliveries produced: normal, 4,000; cesarean, 8,000.

b. Direct materials purchased and used: 200,000 pounds at $9.50—35,000 for normal maternity patients and 165,000 for the cesarean patients; no beginning or ending raw materials inventories.

c. Nursing labor: 50,700 hours—10,200 hours for normal patients and 40,500 hours for the cesarean; total cost of labor, $580,350.

Required:

1. Prepare a standard cost sheet showing the unit cost per delivery for each type of patient.

2. Compute the materials price and usage variances for each type of patient.

3. Compute the labor rate and efficiency variances for each type of patient.

4. Assume that you know only the total direct materials used for both products and the total direct labor hours used for both products. Can you compute the total materials usage and labor efficiency variances?

Answer 1

Question 1

The standard Costing Sheet is a estimate of the standard cost that is incurred based on an allocation methodology followed by an organisation. In the above example, the Variable costs and Fixed costs are allocated based on the hours of Direct Labor. Hence it is easy to compute the Total Cost as:

(Direct Materials X Price per pound of Direct Materials) + (Direct Labor X (Standard Labor Rate + Variable Overhead per Hour + Fixed Overhead per Hour). The Standard Cost sheet will look as follows:

		Normal		Cesarean
	Standard Price	Standard Usage	Standard Cost	Standard Usage	Standard Cost
Direct Materials	10	9.00	90	21.00	210
Direct Labour	16	2.50	40	2.50	40
Variable Overhead	30	2.50	75	2.50	75
Fixed Overhead	40	2.50	100	2.50	100
Total Cost per Patient			305		425

Question 2

The Material Price variance(MPV) can be computed as (Actual Price of Materials - Standard Price of Materials) X Actual Quantity.

Hence, MPV for Normal Maternity is

(9.5 - 10) X 35,000 = 17,500 Favourable Variance

MPV for Cesarian Maternity is

(9.5 - 10) X 165,000 = 82,500 Favourable Variance

The Material Usage variance(MUV) can be computed as (Standard Quantity of Materials - Actual Quantity of Materials) X Standard Price

Hence, MUV for Normal Maternity is

((4000 X 9) - 35,000) X 10 = 10,000 Favourable Variance

MUV for Cesarian Maternity is

((8000 X 21)- 165,000) X 10 = 30,000 Favourable Variance

Question 3

The Labor Rate Variace is computed as (Standard Rate - Actual Rate)

Based on the above info. the Actual cost per hour of Labour is 580,350/50,700 = $11.45

the Labor rate variance can be computed as (Actual Rate - Standard Rate) X Actual Hours

Hence LRV for Normal = (11.45 - 16) X 10200 = $46,443 Favorable

LRV for Caserian = (11.45 -16) X 40500 = $184,407 Favorable

Similarly Labor Efficiency Variance can be computed as (Actual Hours - Standard Hours) X Standard Rate

Normal LEV = (10,200 - (2.5 X 4000)) X 16 = $3,200 Adverse

Cesarian LEV = (40,500 - (5 X 8000)) X 16 = $8,000 Adverse

Question 4

Yes. With the total direct materials and total labor hours used, we can compute the Material Usage Variances and Labour Efficiency Variance in total

MUV = (((4000 X 9) + (8000 X 21)) - 200,000) X 10 = 40,000 Favorable

LEV = (((4000 X 2.5) + (8000 X 5)) - 50,700) X 16 = 11,200 Adverse